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Intelligent Machines

Why Nasdaq Is Betting On Bitcoin’s Blockchain

In its highest-profile application yet, Bitcoin’s public transaction record will help startups keep track of shares and shareholders.

Those who use commercial database tools have to trust their valuable data to the companies that market those tools.

It’s much too early to tell whether Bitcoin is the future of money, but a recently launched Nasdaq experiment will test whether it can be the future of financial record keeping.

The stock exchange announced recently that it has begun experimenting with the blockchain—the publicly accessible and cryptographically verified record of every single Bitcoin transaction that has ever occurred. Transactions are verified and recorded in the blockchain by a network of “miners” all over the world who exchange their computing power for a chance to solve complex cryptographic puzzles and earn money—freshly minted bitcoins. Specifically, Nasdaq will take advantage of a feature in Bitcoin’s design that allows additional data to be recorded on the blockchain along with information about a Bitcoin transaction (see “Why Bitcoin Could Be Much More Than a Currency”).

Nasdaq intends to use this feature of the blockchain to streamline financial record keeping while making it cheaper and more accurate. Though the company says the blockchain initiative could ultimately be used to record trades of stocks in public firms listed on its exchange, it will begin by focusing on its relatively new private market platform, a service that connects private companies with investors. In this case, record keeping via the blockchain will complement a cloud-based data management tool that tracks who owns shares of a given company, and how much they own.

Keeping track of a company’s ownership structure can be a complicated, time-consuming, and expensive task, especially for fast-growing startups looking to attract new investors. In many cases, companies manage their own data in a spreadsheet program like Microsoft Excel, and pay lawyers to validate the information every time the table changes.

Meanwhile, errors in this record can be costly, says Brad Peterson, Nasdaq’s chief information officer. “There’s really no great system in place to ensure that this is done accurately along the way and is auditable to the beginning of time,” says Peterson. He and his colleagues at Nasdaq think the blockchain can be essential to such a system.

To understand how this will work, imagine an employee wants to sell a percentage of her shares. Nasdaq’s existing service will match those shares to an investor who wants to buy them, facilitate the transfer, and update the record of the company’s shareholders. Now, for the few companies that have agreed to experiment with the blockchain, a “corresponding entry” will be made in the Bitcoin transaction record that would contain certain important information about the transaction, such as the timing and number of shares involved. Last month, Nasdaq announced that it has partnered with blockchain technology startup Chain to help it technically implement this part.

The beauty of storing high-value information in the blockchain, says Chain’s founder Adam Ludwin, is that it does not require that people trust any single entity, like a company that may go out of business or change hands, with the task of accurately recording this information. The blockchain, he says, is an “immutable record that everyone can see and agree with.”

Chain, which is itself one of the first companies participating in Nasdaq’s blockchain program (the others haven’t officially been announced), is helping Nasdaq determine exactly how to represent company shares on the blockchain. It is also developing blockchain reader applications that will allow companies and individual shareholders to access certain information that they have permission to view, using private encryption keys (see “What Bitcoin Is and Why It Matters”).

Peterson says Nasdaq will explore opportunities to implement blockchain technology in other areas of its business, a large part of which is supplying the underlying technologies that run various securities exchanges around the world. One potential complication to the vision, however, stems from the current uncertainty and controversy over how Bitcoin’s core developers should modify its software so it can better handle growing transaction volumes (see “Leaderless Bitcoin Struggles to Make Its Most Crucial Decision Yet”).

In addition to Chain, the first test cases will be “a handful” of companies and investors that are “really supportive of this industry because they are in it,” says Peterson. If things work out, the plan is to expand the project to include other small startup companies that would have a “natural affinity” to this kind of secure record keeping, he says. In particular, says Peterson, “We think information security companies are going to see the merits of this approach and will want to show that they are forward thinking.”

Hear more about Bitcoin from the experts at the Business of Blockchain on April 23, 2018 in Cambridge.

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